Israel Is Unique in the History of Socialism - Granite Grok

Israel Is Unique in the History of Socialism

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Israel is unique in the history of socialism. It is the only nation where socialism was considered successful for a while. The original settlers of Israel came largely from Eastern Europe. They sought to create an economy in which market forces were controlled for the benefit of the whole society.

They were driven by a desire to leave behind their history.

They had been victims of a cramping and oppressive lack of resources, severe poverty and prejudice. In their new homeland they sought an egalitarian, labor oriented socialist society. But, they wanted to bring with them what they were fleeing.

The initial, homogeneous population of less than 1 million drew up plans. They began to convert the desert into green pastures and build “efficient state-run companies”. Then reality happened.

Most early settlers worked either on collective farms, kibbutzim, or in state-guaranteed jobs. The kibbutzim were small farming communities. There people did chores in exchange for food, money to live on and to pay their bills. There was no private property. People ate in common, children under 18 lived together; not with their parents. All money earned on the outside was given to the kibbutz.

A key player in the socialization of Israel was the Histadrut, the General Federation of Labor. They were subscribers to socialist dogma. They believed capital exploits labor. Moreover they believed the only way to prevent such “robbery” is to grant control of the means of production to the state.

The Histadrut proceeded to unionize almost all workers. Soon it gained control of nearly every economic and social sector. Its control extended to the kibbutzim, housing, transportation, banks, social welfare, health care, and education.

The federation’s political instrument was the Labor party. Effectively the Labor Party ruled Israel. This was true from the founding in 1948 until 1973 and the Yom Kippur War. In the early years, few asked whether there should be any limits placed on the role of government.

Israel’s economic performance seemed to confirm Keynes’s judgment. Real GDP growth from 1955 to 1975 was an astounding 12.6%. This put Israel among the fastest-growing economies in the world. It also allowed Israel one of the lowest income differentials. This rapid growth was accompanied by rising levels of private consumption.

Over time, increasing income inequality became apparent. There was increasing demand for economic reform. The focus was on freeing the economy from the government’s central decision making. In 1961, supporters of economic liberalization formed the Liberal party. This was Israel’s first market economy political movement.

The Israeli “economic miracle” evaporated in 1965 with the country’s first major recession. Economic growth halted. Unemployment rose threefold from 1965 to 1967. Before the government could attempt corrective action the Six-Day War erupted. The war was responsible for altering Israel’s economic and political map.

The war brought short-lived prosperity to Israel. The increased military spending and a major influx of workers from new territories stimulated the economy. Soon the government led economic growth was accompanied by accelerating inflation. The inflation spike reached an annual rate of 17% from 1971 to 1973.

For the first time, there was a public economic debate. On one side were supporters of free-enterprise economics. They were opposed by supporters of traditional socialist arrangements. Leading the way for the free market was the future Nobel Prize winner Milton Friedman. Friedman urged Israeli policymakers to “set your people free” and liberalize the economy.

The 1973 war and its economic impacts reinforced the feelings of many Israelis. The Labor party’s socialist model could not handle the country’s growing economic challenges. The 1977 elections resulted in the victory of the Likud party. Likud had a staunch pro-free-market philosophy. The Likud took the Liberal Party as one of its coalition partners.

Because socialism’s roots in Israel were so deep, real reform proceeded slowly. Friedman was tasked to draw up a program to move Israel from socialism toward a free-market economy. His major reforms included fewer government programs and reduced government spending.

Friedman favored less government intervention in fiscal, trade, and labor policies. His vision was for income-tax cuts and privatization. A great debate ensued. Again on one side were the Likud government officials seeking reform. On the other side were special interests supporting the status quo.

All the while the government kept borrowing and spending. This drove up inflation more. It averaged 77% for 1978–79. The peak was reached at 450% in 1984–85. The government’s share of the economy grew to 76%. Fiscal deficits and national debt skyrocketed. The government printed money. This was done through loans from the Bank of Israel. It further contributed to inflation as it churned out money.

Finally, in January 1983, the bubble burst. Thousands of private citizens, businesses and government run enterprises faced bankruptcy. Israel was close to collapse. At the critical moment, a sympathetic U.S. president, Ronald Reagan, and his secretary of state, George Shultz, came to the rescue.

They offered a grant of $1.5 billion… if the Israeli government agreed to abandon its socialist rulebook and adopt some form of U.S.-style capitalism. Israel must use American-trained professionals.

Predictably, the Histadrut strongly resisted. They were unwilling to give up their decades old power. They would not concede that socialism was responsible for Israel’s economic troubles. However, the people had had enough of soaring inflation. The people were done with the non-existent growth and rejected the Histadrut’s policy of resistance.

Still, the Israeli government hesitated, unwilling to spend political capital on economic reform. An exasperated Secretary Schulz informed Israel, if it did not begin freeing up the economy, the U.S. would freeze “all monetary transfers”. The threat worked. The Israeli government officially adopted most of the free-market “recommendations.”

The impact of a basic shift in Israeli economic policy was immediate and pervasive. Within a year, inflation tumbled from 450% to just 20%. The Israeli budget deficit of 15% of GDP shrank to zero. The Histadrut’s economic and Business Empire disappeared. Along with went its political domination.

The Israeli economy was opened to imports. Soon there came the Israeli high-tech revolution. It led to a 600% increase in investment in Israel. The capital infusion began transforming the country into a major player in the high-tech world.

There were troubling side effects. Among them were social gaps, poverty, and concerns about social justice. But the socialist rhetoric and ideology was permanently retired. The socialist Labor party endorsed privatization. It also came to support the divestment of many publicly held companies. It became apparent those companies had become corrupted. They had been indulging in featherbedding, rigid work rules, phony bookkeeping, favoritism, and incompetent managers.

After modest expansion in the 1990s, Israel’s economic growth topped the charts in the developing world in the 2000s. It was propelled by low inflation and a reduction in the size of government. Unemployment was still too high and taxes took 40% of GDP. Much of government spending was caused by the need for a large military.

Today however, political parties are agreed. There is no turning back to the economic policies of the early years. The debate is about the rate of further market reform. The world’s most successful experiment in socialism appears to have resolutely embraced capitalism.

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